The Welfare Impact of Reducing Choice in Medicare Part D: A Comparison of Two Regulation Strategies

NBER Working Paper No. 14296Issued in September 2008, Revised in October 2011NBER Program(s):The Health Care Program

Motivated by widely publicized concerns that there are "too many" plans, we structurally estimate (and validate) an equilibrium model of the Medicare Part D market to study the welfare impacts of two feasible, similar-sized approaches for reducing choice. One reduces the maximum number of firm offerings regionally; the other removes plans providing donut hole coverage - consumers' most valued dimension. We find welfare losses are far smaller when coupled with elimination of a dimension of differentiation, as in the latter approach. We illustrate our findings' relevance under current health care reforms, and consider the merits of instead imposing ex ante competition for entry.